News Analysis

Wednesday 17 September 2014

Declan O’Brien: Supermarkets burying profits they earn from 'Treasure Island'

Declan O'Brien

Published 03/01/2013 | 05:00

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A recent report on food prices from the World Bank made for sober reading. The publication warned that prices remained at historically high levels and pointed out that the world could not afford to be "complacent to this trend".

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According to the World Bank, food prices are 7pc higher than a year ago, with cereals such as wheat and barley 12pc higher than 2011 levels and very close to the all-time high prices of 2008.

This year's price hikes were driven in part by the worst drought in the US mid-west for more than half a century and export restrictions in countries such as Ukraine and Argentina.

The outlook for the year ahead is for the price of grain and other basic food commodities to remain high. So what are the implications of these trends for Irish consumers and for our food producers?

There are certainly mixed messages out there for consumers but the general consensus is that Irish food prices will stay high and continues to be considerably dearer than in other EU countries.

A Eurostat survey published earlier this summer found that food prices here were 18pc higher than the EU average and the Republic was the fifth highest-priced country in the EU for food and non-alcoholic drinks.

This is certainly an improvement on two years ago when food prices here were 28pc higher than average EU levels. But the question remains: why is Ireland among the most expensive countries in Europe in terms of food price, while at the same time being a major food exporter?

The answer lies in the power of the supermarkets and the impact they have on product choice and provenance.

While Irish food exports are estimated to be worth €8.8bn, figures released by the Central Statistics Office (CSO) earlier this year showed that food imports in 2011 increased by almost 10pc to reach just under €5bn.

Most of these food imports were driven by the supermarket chains. And while some imports such as fruit are not available in Ireland, a considerable proportion is driven by the fact that multi-national retailers have suppliers outside Ireland and therefore do not need to source produce locally. The fact that €2bn worth of food was imported from Britain in 2011 confirms this.

Love Irish Food, the initiative set up to encourage consumers to choose Irish food and drink brands, has estimated that at least €1.5bn worth of branded grocery food products sold in the 12 months to the start of August were imported.

This equates to around 45pc of the market.

There is obviously no obligation on multiples to replace foreign suppliers with locals. However, it would be a fair assumption that greater competition for business should drive prices down for consumers.

But this does not appear to be the case in Ireland and it has led to accusations of the multiples here taking far greater margins than they do elsewhere in the EU.

The fact that many retailers have refused to disclose profit levels for their Irish operations, and the fact that Ireland has been referred to as 'Treasure Island' in supermarket circles, adds weight to these claims.

But if high food prices are bad news for consumers, they should offer the prospect of better returns for farmers.

Expensive grain invariably means stronger beef prices and reduced supplies on world markets. And that appears to be the case at the moment.

The same holds true for the price of dairy commodities like cheese and butter, as well as by-products such as whole milk powder and skim milk powder.

The fact that Irish farmers can produce both milk and beef primarily off cheap grass rather than expensive grain gives us a distinct advantage on global markets.

The benefits of grass-fed beef and of the more natural rearing regimes generally employed on Irish farms are also opening up new and lucrative markets for Irish produce.

Indeed, the US is close to being re-opened for Irish beef and lamb and Irish exporters are already looking at the possibilities of targeting the top end of that market.

On the dairy front, growing demand for produce in the Far East, Africa and Middle East continues to underpin prices.

However, world markets remain volatile and farmer margins can very quickly be eroded by commodity traders and by the take of processors and retailers.

Consumers and producers may be at opposite ends of the supply chain but, ironically, both are price takers; it is the boys in the middle that call the tune.

Irish Independent

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